What the ebook settlement means for publishers, Apple and you

The states unveiled a deal this week that, if approved, would see consumers collect a refund of $0.25 to $1.32 for each ebook they bought from big publishers. It’s splashy news, but the reality is more complicated. Here’s an easy-to-read explanation of the latest twist in the fight over ebook pricing.

Background

Recall that publishers and Apple have been in a throw down with the government over the price of ebooks. Government lawsuits say that the publishers’ switch to a commission-style pricing system (like the one used in iTunes) amounted to price-fixing. Three of the five publishers threw in the towel while Apple and two hold-out publishers are fighting in court.

The feds’ lawsuit demands that publishers change their pricing model so that Amazon and others can set the price they want (even it the price is below cost). The lawsuit by the states is instead about money; the states want to collect refunds on behalf of ebook buyers.

Three publishers agreed to pay up several months ago, but it was only on Thursday that the dollar figures finally came out. Meanwhile, Apple and the others are refusing to play ball.

What the deal means for you: a tiny Kindle or iTunes credit and a long wait

If you bought an e-book from one of the five big publishers between April 1, 2010 and May 23, 2012, you will get a 25-cent refund for each old title you bought and $1.32 if the title was a recent New York Times bestseller. The refund will come in the form of a credit to your Amazon, Barnes & Noble or iTunes account; you’ll get a check if you bought from Sony or Google. The retailers have your email address so it will not be hard to notify you.

This is a micro-windfall that you probably weren’t expecting, so it’s all to the good. The only catch is that it will be a long time coming. U.S. District Judge Denise Cote has to stamp the deal — and there’s a good chance she won’t while the case is ongoing against Apple and two hold-out publishers. Realistically, we’re talking years before that $1.32 credit hits your iTunes account. If the two hold-out publishers and Apple finally decide to settle, you may get another small credit.

What it means for publishers: ebook sales and an escape from the class action lawyers

The three publishers who struck a deal are looking smarter by the minute. The settlement not only gets them out of legal purgatory, it will lead to most of the money they pay coming right back to them. What do you think the average person is going to do with a $1.32 Barnes & Noble credit? That’s right. They will buy an ebook that likely costs $5 or $10. This is almost a net win for the publishers.

Just as important, the settlement lets publishers short-circuit the class action lawyers who are coming at them with a separate lawsuit. Those lawyers, who say they would get more money if they were in charge, are now frozen out because there is no money left to collect on behalf of consumers.

The two hold-out publishers, Macmillan and Penguin, now face a hard choice. They have to decide if their fight to keep commission pricing is worth years of legal bills and uncertainty (keep in mind, they could lose the case and face an even stiffer penalty). Given this choice, it’s possible that the publishers, even if they believe they did nothing wrong, will find it easier to just accept the states’ deal and move on.

What it means for Apple: fighting on

Unlike the publishers, Apple has more lawyers than the state of Connecticut. It can (and will) fight this thing forever. At the same time, Apple has a stronger defense than the publishers — it wasn’t in the room or on the phone when many parts of the alleged conspiracy took place.

Apple, which says it did nothing wrong, may also be concerned with protecting the commission model of its iTunes store (if the government wins on ebooks, will it come after apps or music pricing next?).

Finally, if the two other publishers fold and join the settlement, the government may quietly close the case against Apple rather than risk losing an expensive and high-profile court fight.

What it means for the government: election year headlines

The settlement is a trophy for Connecticut Attorney General George Jepsen and his counterparts around the country. They can tell voters, shortly before November elections, that they have won refunds for home state consumers.

This is a big fudge, of course. According to Beth Farmer, an antitrust professor at UPenn, the court is unlikely to approve the deal while the dispute with Apple, Macmillan and Penguin is ongoing. “The notice and claims process is going to be complicated and it wouldn’t be efficient for the states to do that multiple times,” said Farmer by email last month.

Andre Barlow, a former Justice Department lawyer and antitrust expert, is also skeptical. “It’s not a clean way of doing this but it probably makes sense for the states to do it this way … At least they’ll have a big headline.”